Business Income - Inadmissible Expenses
Tuesday, April 23, 2013
Deductions Not Admissible (Section 21)
i) Amount paid or payable on account of any cess, rate or tax levied on profits or gains of business or assessed as percentage or otherwise on the basis of such profits or gains. Tax shall include any tax paid or payable in Pakistan or in a foreign country. Note: In case where sales tax paid by a tax payer is not charged by him to his customers, such sales tax shall be allowed as deduction.
ii) Any amount of tax deducted at source under division III of Part V of Chapter X. being tax deducted at source u/s 149 to 158.
iii) Any sum paid on account of salary, profit on debt, brokerage, commission, rent, payment to non-resident, payment for services or fee paid by the person unless tax is paid or deducted at source and paid under Income Tax Ordinance, 2001.
iv) Any entertainment expenditure in excess of such limits or in violations of such conditions as may be prescribed.
Limits prescribed for allowing any expenditure on entertainment are as under (Rule 10).
Expenditure should be incurred in deriving income from business chargeable to tax and should not be in excess of following limits or in violation of condition specified:
a) Such expenditure is: -
- Incurred outside Pakistan on entertainment in connection with business transactions: or
- Allocated as head office expenditure; or
b) Incurred in Pakistan on the entertainment of foreign customers & suppliers;
c) Incurred on the entertainment of customer & clients at the person’s business premises
d) Incurred on the entertainment at the meeting of shareholders, agents, directors or employees
e) Incurred on entertainment at the opening of branches. Note All these person (who are entertained) should be related directly to the person’s business.
v) Any contribution to un-recognized provident fund, unapproved pension, superannuation or gratuity funds. Moreover, contributions to any fund unless effective arrangements are made to deduct tax shall also be inadmissible.
vi) Any sum paid by an association of persons to a member of the association on account of profit on debt, commission, salary, brokerage or any other remuneration.
vii) Any expenditure paid or payable exceeding Rs. 10,000 on a single item is inadmissible if the balance under relevant head of account exceeds Rs.50,000 and the payment is made otherwise than through crossed bank cheque or crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer.
Provided that online transfer of payment from the business account of the payer to the business account of payee as well as payments through credit card shall be treated as transactions through the banking channel, subject to the condition that such transactions are verifiable from the bank statements of the respective payer and the payee.
However, this shall not be applicable in case of payments for:
- freight charges; -
- travel fare; -
- postage; -
- utility bills; and -
- taxes, duties, fee, fines or other statutory obligation
viii) Salary exceeding Rs.15,000 per month not paid through crossed cheque or bank transfer to employee’s account.
ix) Any payment of a fine or penalty for the violation of any law or rule or regulation.
x) Any personal expenditure.
ix) Any payment of a fine or penalty for the violation of any law or rule or regulation.
x) Any personal expenditure.
xi) Any amount carried to a revenue fund or capitalized in any way.
xii) Any capital expenditure. However, depreciation or amortization shall be allowed in respect of a depreciable asset, intangible or pre-commencement expenditure.
Income From Business - Definition and Admissible Expenses
Monday, April 22, 2013
The following incomes of a person for a tax year, other than exempt incomes, shall be chargeable to tax under this head of income:
- Any profit and gain from a business which is carried on by the person at any time in the year.
- Any income derived by any trade, professional or similar association from the sale of goods or provision of services to its members (e.g. Cloth Merchants Association, Professionals Association, Stock Exchange, Chamber of Commerce etc.)
- Any income from the hiring or lease of tangible movable property.
- The fair market value of any benefit or perquisite derived by a person from any past, present or future business relationship. However, it is clarified that the word ‘benefit’ includes any benefit derived by way of waiver of profit on debt or the debt itself under SBP circular 29 of 2002 or in any other scheme issued by SBP.
- Any management fee derived by a management company including modaraba management company.
- Any profit on debt derived, where the business of a person is to derive such income;
- In case where a lesser, being a scheduled bank or an investment bank or a development finance institution or a modaraba or a leasing company has leased out any asset, whether owned by it or not, to another person, any amount paid or payable by the said person in connection with the lease of said asset shall be treated as the income of the said lessor and shall be chargeable to tax under the head “Income from Business”.
- Any amount received by a banking company or a non-banking finance companies, where such amount represents distribution by a mutual fund or a Private Equity and Venture Capital Fund out of its income from profit on debt, shall be chargeable to tax under the head “Income from Business” and not under the head “Income from other sources”.
ADMISSIBLE DEDUCTIONS (SECTION 20)
- In computing the income of a person chargeable to tax under the head “Income from Business” for a tax year, a deduction shall be allowed for every expenditure incurred wholly & exclusively for the purpose of business.
- Where animals which have been used for the purposes of business or profession otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the tax payer of the animals and the amount, if any, realized in respect of carcasses or animals. Admissibility of this expenditure has encouraged dairy farming businesses.
- If the expenditure stated above is incurred in acquiring a depreciable asset or an intangible with a useful life of more than one year or is pre-commencement expenditure, the person must depreciate or amortize the expenditure in accordance with sections 22, 23, 24 and 25.
- Expenditure incurred by an amalgamated company on the financial advisory services and other administrative cost relating to planning and implementation of amalgamation shall be allowed as deduction. To the amalgamated company.
Capital Gains - Section 37, 37A and 38
Saturday, April 20, 2013
Gain arising on the disposal of a capital asset by a person in a tax year shall be chargeable to tax in that year under the head "Capital Gains".
Gain shall be computed as:–
A – B
A is the consideration received by the person on disposal of the asset; and
B is the cost of the asset.
Where a capital asset has been held by a person for more than one year, the amount of any gain arising on disposal of the asset shall be computed in accordance with the following formula, namely: —
A x ¾
where A is the amount of the gain determined as above
(4) For the purposes of determining component B of the formula in sub-section (2), no amount shall be included in the cost of a capital asset for any expenditure incurred by a person –
(a) that is or may be deducted under another provision of this Chapter; or
(b) that is referred to in section 21.
Where the capital asset becomes the property of the person —-
(a) under a gift, bequest or will;
(b) by succession, inheritance or devolution;
(c) a distribution of assets on dissolution of an association of persons; or
(d) on distribution of assets on liquidation of a company,
the fair market value of the asset, on the date of its transfer or acquisition by the person shall be treated to be the cost of the asset.
Capital Asset means property of any kind held by a person, whether or not connected with a business, but does not include —
(a) any stock-in-trade , consumable stores or raw materials held for the purpose of business;
(b) any property with respect to which the person is entitled to a depreciation or amortization deduction;
(c) any immovable property;
(d) any movable property excluding following assets held for personal use by the person or any member of the person‘s family dependent on the person
(a) A painting, sculpture, drawing or other work of art;
(c) a rare manuscript, folio or book;
(d) a postage stamp or first day cover;
(e) a coin or medallion; or
(f) an antique.
No loss shall be recognized under this Ordinance on the disposal of the above personal capital assets.
Capital gain on disposal of securities.— Section 37A
The capital gain arising on or after the first day of July 2010, from disposal of securities held for a period of less than a year, shall be chargeable to tax at the rates specified in Division VII of Part I of the First Schedule:
Provided that this section shall not apply :
1. if the securities are held for a period of more than a year:
2. to a banking company and an insurance company.
- share of a public company,
- voucher of Pakistan Telecommunication Corporation,
- Modaraba Certificate,
- an instrument of redeemable capital and
- derivative products.
Gain under this section shall be treated as a separate block of income.
Where a person sustains a loss on disposal of securities in a tax year, the loss shall be set off only against the gain of the person from any other securities chargeable to tax under this section and no loss shall be carried forward to the subsequent tax year.
Deduction of losses in computing the amount chargeable under the head Capital Gains — Section 38
A deduction shall be allowed for any loss on the disposal of a capital asset by the person in the year.
No loss shall be deducted under this section on the disposal of a capital asset where a gain on the disposal of such asset would not be chargeable to tax.
Income From Property
Monday, April 8, 2013
Property means an immovable property whether improved / constructed or not, other than agricultural land from which the income derived is “agricultural income”. It includes land containing natural resources and income from lease of such land shall be rental income of property.
RENT [SECTION 15(2)]
Rent means any amount received or receivable for a tax year, by the owner of land or a building as consideration for the use or occupation of or the right to use, occupy the land or building. This also includes any forfeited deposit paid under a contract for the sale of land or a building.
INCOME FROM PROPERTY (SECTION 15)
Rent received or receivable for a tax year except rent exempt from tax, shall be chargeable to tax under the head "Income from property". [Section 15(1)].
Rent is taxable on accrual basis.
Where rent received or receivable is less than fair market rent for the property, the owner shall be treated as having received the fair market rent for the period the property is let on rent in the tax year. However, this shall not apply where fair market rent is included in the income of this lessee, chargeable to tax under the head “Salary”. [Section 15(4) & (5)]
UNADJUSTABLE ADVANCE [SECTION 16]
Where the owner of building receives an advance which is not adjustable against rent, the whole of advance shall be treated as rent chargeable to tax under the head income from property in the year of receipt and following nine tax years in equal proportion i.e. 1/10th of such un-adjustable advance shall be included in the total income of assessed under the head “income from property”. in 10 tax years commencing from the tax year in which the advance is received.
If advance is refunded in any year before the expiry of 10 years such advance shall not be included in the income from the tax year in which it is refunded.
After vacancy, if the property is let out again against another advance, new advance less advance already charged to tax shall be taxable in ten equal installments in 10 tax years, commencing from the tax year in which the advance is received from the succeeding tenant.
Salary Income - Difference Provisions
Friday, April 5, 2013
|Sr #||Description||Taxablity||Remarks / Condition / Limit|
|1||Utility Allowance||Taxable||Includes water, gas, electricity allowance.|
|2||House Rent Allowance||Taxable|
|3||Free accommodation||Taxable||45% of B. Salary or FMV of rent whichever is higher|
|4||Leave Fare Assistance||Taxable|
|5||Salary of domestic servant||Taxable||Includes house keeper, gardener, etc.|
|6||Capital Receipt on termination of employment||Taxable|
|7||Tax Paid by the employer - Tax on tax||Taxable||Amount would be grossed up by tax paid by employer.|
|8||Interest free / concessional rate Loan||Taxable||Difference between bench mark rate (10%) and rate charged by the employer.|
|Interest free / concessional rate Loan||Not Taxable||a) When amount of loan is upto Rs.500,000/-|
|b) Employee waives interest on his account with employer|
|10||Motor Vehicle||Taxable||Upto 5% of cost / FMV - Partly for Pvt. Use|
|(owned & maintained by employer)||Taxable||Upto 10% of cost / FMV - Wholly for Pvt. Use|
|11||Waiver of loan by the employer||Taxable|
|12||Discharge of debt by the employer||Taxable|
|13||Transfer to assets / Property||Taxable||FMV of asset: Less consideration paid if any.|
|14||Employee Share Scheme|
|Value of Right / Option||Not Taxable|
|Disposal of Right / Option||Taxable||Difference b/w consideration and cost of right / option.|
|Acquistion of Shares - without Ristriction||Taxable||Difference b/w FMV and cost of right / option. - At the time of acquition|
|Acquistion of Shares - With Ristriction||Taxable||Difference b/w FMV and cost of right / option. - At the earlier of time of end of restriction or actual disposal of shares.|
|15||Medical Allowance - without medical facility||Taxable||Exempt up10% of Basic salary|
|Medical Allowance - with Reimbursement||Taxable||No exemption|
|16||Medical benefit / Reimbursement (in accordance with the terms of employment)||Exempt if||- NTN of the hospital / clinic is disclosed|
|- The employer certifies and attests the bills|
|17||Special Allowance||Exempt if||Given to meet expenses in performance of official duties|
|18||Employer's contribution to App. Provident Fund||Exempt||Lower of 10% of B.S. + Dearness allowance / Rs.100,000|
|19||Employer's contribution to Non approved PF.||Exempt||and Taxable at the time of receipt of fund amount|
|20||Interest on approved provident fund||Exempt|
|21||Gratuity / Superannuation / Communation of Pension - ( Received in Pak. by resident)||On Retirement / Death|
|Exempt||Received from approved funds|
|Exempt||Upto Rs. 200,000/- if received from approved schemes|
|Exempt||Lower of 50% of amount received/Rs.75,000 - Other cases|
|20||Pension||Exempt||Where person does not continue work with same employer or an associate of the employer|
|Exempt||One of highest if received from more than one source.|
Medical Allowance - Tax Treatment
Wednesday, April 3, 2013
According to Clause 139 of part 1 (Exemption from total income) of 2nd Schedule of Income Tax Ordinance, 2001
a) If Medical Facility or reimbursement of actual Medical expenses is provided:
- in accordance with terms of employment: The amount provided is fully exempt if NTN of medical practitioner and employer's attestation are available.
- Not in accordance with terms of employment: The amount provided is fully taxable
b) Medical Allowance provided: Tax Treatment is exempt upto 10% of Basic Salary
c) Medical allowance is provided in addition to medical facility or reimbursement in accordance with the terms: Tax Treatment is Medical allowance fully taxable and Facility / reimbursement is Fully Exempt if NTN of medical practitioner and employer's attestation are available.
d) Medical allowance is provided in addition to medical facility or reimbursement but NOT in accordance with the terms: Tax Treatment is Medical allowance is exempt upto 10 % of Basic Salary and Facility / reimbursement is Fully taxable.
Ref: Income Tax Ordinance, 2001
“Employee Share Scheme” means any agreement or arrangement under which a company may issue shares in the company to –
(a) an employee of the company or an employee of an associated company; or
(b) the trustee of a trust and under the trust deed the trustee may transfer the shares to an employee of the company or an employee of an associated company.
Right or Option to Acquire Shares
The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax.
Where, in a tax year, an employee disposes of a right or option to acquire shares under an employee share scheme, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount of any gain made on the disposal computed in accordance with the following formula, namely:–
A is the consideration received for the disposal of the right or option; and
B is the employee’s cost in respect of the right or option.
Issue of Shares:
Where, in a tax year, an employee is issued with shares under an employee share scheme including as a result of the exercise of an option or right to acquire the shares, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the shares determined at the date of issue, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.
Where shares issued to an employee under an employee share scheme are subject to a restriction on the transfer of the shares –
(a) no amount shall be chargeable to tax to the employee under the head “Salary” until the earlier of –
(i) the time the employee has a free right to transfer the shares; or
(ii) the time the employee disposes of the shares; and
(b) the amount chargeable to tax to the employee shall be the fair market value of the shares at the time the employee has a free right to transfer the shares or disposes of the shares, as the case may be, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.
The cost of the shares to the employee shall be the sum of –
(a) the consideration given by the employee for the shares;
(b) the consideration given by the employee for the grant of any right or option. and
(c) the amount chargeable to tax under the head “Salary”.